An extremist, not a fanatic

May 31, 2012

That notorious Newsnight interview is just one of many examples of the widespread tendency to stigmatize benefit recipients. Why does this happen?

It's not because of the numbers involved. DWP data show that in 2010-11, working age people received £50.7bn in benefits; most of the welfare bill goes to pensioners. That's 3.4% of GDP and 9.6% of total taxes. Almost one-third of this (£15.5bn) was housing benefit, which - given that it tends to raise rents - might be more properly called landlords' benefit.This £50.7bn was spread across 5.7 million people, implying an average benefit of less than £170 per week.

Stories of households raking in thousands of pounds in benefit are, therefore, the exception. The government has estimated that its £26,000 benefit cap will affect 67,000 households.Assuming two adults per household, this implies that only around one in 42 individuals on benefit get what the government deems to be a high income.

To callibrate this, the chances of winning a lottery prize are one in 54.The belief that benefit claimants are living it large is, therefore, only slightly more rational than the belief that the lottery is a good investment.

Given the paucity of the numbers, the question arises: why are people so quick to attack benefit recipients?

Part of the answer, I suspect is that humans have evolved a powerful norm of reciprocity. We therefore instinctively hate those who get something for nothing, and wish to see them punished.

This, though, can't be the whole story. There's another group that also gets public support - bankers. The Bank of England estimates that the subsidy to banks could be over £100bn - twice the benefit bill.However, whilst there is public anger at bankers, this is not as well reflected in the media or mainstream politics as anger and benefit recipients.

Something else, then, is going on. I'd suggest three things.

One is the salience heuristic. The tiny minority of benefit recipients who do well get attention - either from the media or from being in the pub. The recipient who lies in hospital and has their benefit cut is less salient. In this way, the image of benefit recipients is systematically distorted.

Secondly, there's a managerialist belief in the fiction of a perfectible organization. The fact is that any feasible welfare system which supports the unlucky will also give handouts to a few scroungers, as the latter cannot be fully screened out. Attackers of benefit recipients forget Adam Smith's words, that "there is a great deal of ruin in a nation" - that some imperfections are inevitable.

Thirdly, there's a "blaming the victim" effect. The wishful thinking that causes us to believe (pdf) in a just world leads us to want to blame the victims of disability or recession for their plight. Such an instinct is as old as history. Job's friends think he is to blame for his sufferings; rape victims are sometimes blamed or even killed for misfortune; and Jon Elster says that in ancient Greece:

The irrational admiration of the beautiful or of those born rich was matched by an equally irrational contempt for the ugly or for those born poor (Alchemies of the Mind, p163)

Attacks on benefit recipients are, in this sense, an ancient and atavistic impulse - which just happens to serve a useful political function.

But let's not kid ourselves that a psychiatric disorder is part of legitimate political discourse.

May 30, 2012

The senior ranks of the professions are a closed shop. If social mobility is to become anything other than a pipedream they will have to open up. Unfortunately, the evidence collected for this report suggests that there is only, at best, limited progress being made in prising open the professions. That is not about to change any time soon.

This raises a question: why is he so keen to increase social mobility?

I ask because it's not obvious that social mobility is wholly desirable. Certainly, it's not sufficient for an acceptable social structure: Imperial China and, I suspect, the Soviet Union had some social mobility, but few applaud such societies.

And at least three political perspectives are sceptical of it. To libertarians, employers (in the private sector) have a right to employ whomever they wish regardless of talent - and the public sector and BBC seem to have embraced this principle. To Marxists, an opportunity to become an exploiter does not legitimize exploitation. And to liberal egalitarians, talent is morally arbitrary so it cannot easily entitle one to a "top job". Yes, Rawls wanted fair equality of opportunity, but he yoked this principle to the idea that inequalities be permissible only to the extent that they improve the lot of the worst-off.

Nor is it obvious that social mobility is desirable in utilitarian terms. Greater social mobility would create isolation amongst people from poor backgrounds who "made it" (trust me, I know), and self-recrimination among those who didn't.

Nor even is it obvious that social mobility is necessary for economic efficiency. If there's a correlation between the poshness of doctors and iatrogenetic effects, Mr Milburn does not provide evidence for it. And I'd suggest that, in banking, social mobility has had catastrophic effects; banks prospered for years when they were run by the old boy network, and collapsed soon after meritocratic physics PhDs and sons of electricians took over.

So, what use is greater social mobility? The answer, I fear, is that it can act to legitimate inequality. As Brian Barry said, a belief in equality of opportunity "cloaks the status quo with legitimacy through a process of mystification."

This works in two ways. One is that the perception that there are opprtunities to get rich reduces people's desire for redistributive taxation.

If meritocrats believe, as more and more of them are encouraged to, that their advancement comes from their own merits, they can feel they deserve whatever they can get.They can be insufferably smug, much more so than the people who knew they had achieved advancement not on their own merit but because they were, as somebody's son or daughter, the beneficiaries of nepotism. The newcomers can actually believe they have morality on their side.So assured have the elite become that there is almost no block on the rewards they arrogate to themselves.

In these senses, the desire for more social mobility serves not egalitarian ends, but their exact opposite.

May 29, 2012

In recent years, there's been a justified backlash against performance-related pay. Paying workers for performance doesn't always elicit better results and might even backfire (pdf) if it crowds out intrinsic motivation or causes people to choke under pressure. However, a couple of things I've seen recently suggest there is a case for such pay.

One is a laboratory experiment at the University of Lyon. Researchers split subjects randomly into managers and workers, with workers answering general knowledge questions and managers assigning rewards to them. They found that managers were more likely to give high rewards to workers if they knew that the workers shared their opinions on subjects such as art, climate change or immigration. This confirms what we all know - that it's not just ability that gets rewarded at work, but conformity, being a "good chap."

However, when managers were paid for their team's performance, they became less inclined to reward conformity declined and more inclined to reward performance.

This is consistent with the finding of a new paper, that, in the UK, "performance pay is associated with a smaller ethnic wage differential" - albeit mainly for Asians rather than blacks and for managerial and supervisory workers.

All this suggests that - under certain conditions - performance pay can reduce favouritism, insofar as it increases the reward for merit rather than for conformity or skin colour. Performance pay, therefore, not only reduces racism, but also increases efficiency by deterring office politicking.

There is, though, a big caveat here. Performance pay only has these benefits if it is clearly tied to objective performance. Work by John Heywood and Emilio Castilla has shown that when such pay contains subjective evaluations, it can actually increase ethnic wage inequalities. And, on might imagine, increase the rewards for conformity too.

So, maybe it is only particular types of very well-defined performance pay that we should applaud, and then only lightly.

May 28, 2012

Does freedom make us happy? Two things I've seen today suggest not. First, a cross-country study of the link between economic freedom and well-being concludes:

Economic freedom is significantly negatively related to life satisfaction if controlled for the influence of income per capita, unemployment, social trust, life expectancy and aging.

Of course, controlling for income is a big control. The raw correlation between freedom and happiness is positive. The message is that economic freedom make us happy insofar as it makes us rich, but it has no intrinsic value for well-being.

Yah boo sucks to neoliberalism, you might think. If you do, my second reading might discomfort you. This paper says:

Women’s happiness seems to fall – at least in the short-term - when there are changes/improvements in gender rights.

All this is consistent with Sheena Iyengar's theory of choice overload - the idea that freedom can reduce our happiness because it increases our regret at options not taken. She's written(pdf):

Choosers in extensive-choice contexts enjoy the choice-making process more—presumably because of the opportunities it affords—but also feel more responsible for the choices they make, resulting in frustration with the choice-making process and dissatisfaction with their choices.

I don't write this to deprecate the value of freedom. None of this research undermines the possibility that freedom is an intrinsic good, worth having regardless of its impact upon happiness. Instead, the point is simply Isaiah Berlin's - that there are unavoidable conflicts between basic human values.

May 27, 2012

In the improbable event of ever being invited to give a commencement address, my advice to graduates wanting a lucrative career would be: become a charlatan. There has always been a strong demand for witchdoctors, seers, quacks, pundits, mediums, tipsters and forecasters. A nice new paper by Nattavudh Powdthavee and Yohanes Riyanto shows how quickly such demand arises.

They got students in Thailand and Singapore to bet upon a series of five tosses of a fair coin. They were given five numbered envelopes, each of which contained a prediction for the numbered toss. Before the relevant toss, they could pay to see the prediction. After the toss, they could freely see the prediction.

The predictions were organized in such a way that after the first toss half the subjects saw an incorrect prediction and half a correct one, after the second toss a quarter saw two correct predictions, and so on. The set-up is similar to Derren Brown's The System, which gave people randomly-generated tips on horses, with a few people receiving a series of correct tips.

And here's the thing. Subjects who saw just two correct predictions were 15 percentage points more likely to buy a prediction for the third toss than subjects who got a right and wrong prediction in the earlier rounds. Subjects who saw four successive correct tips were 28 percentage points more likely to buy the prediction for the fifth round.

This tells us that even intelligent and numerate people are quick to misperceive randomness and to pay for an expertise that doesn't exist; the subjects included students of sciences, engineering and accounting. The authors say:

Observations of a short streak of successful predictions of a truly random event are sufficient to generate a significant belief in the hot hand.

It's easy to believe that this happens in real life. For example, the people who are thought to have predicted the financial crisis of 2008 are invested with an expertise which they might not really have.

Of course, there are other reasons why people might want to pay for forecasts; maybe they want a false sense of security of a predictable world, or they want someone to blame if things go wrong. This paper, however, suggests that these are not the only motives. Instead, people are too quick to perceive skill and thus to pay for something that doesn't exist. The demand for forecasters and tipsters substantially exceeds the real ability such pundits actually have.

May 25, 2012

The Leveson inquiry has drawn our attention to a fundamental political problem which hasn't had the attention it deserves.

I'm referring to the fact that Jeremy Hunt supported News Corp's bid for BSkyB, before Cameron asked him to decide whether that bid should be referred to the Competition Commission. Harriet Harman says such an opinion meant that he did not act in a proper "quasi-judicial" manner in assessing the bid, and so should resign.

But if you want someone to act in a quasi-judicial manner, you should employ a (quasi-)judge, not a politician.

Expecting a politician to act as a quasi-judge is to expect that he will slough off his preconceptions, lobbyists and interests and become a different person.

There seems to be bipartisan agreement that this mental conjuring trick is possible. I'm not sure it is, and still less sure that it should be.

And this is what gets my goat. Everyone in this sorry episode - Labour, Tories and commentators - seems to assume that good decisions can be made, if only the minister has sufficient honour or judgment.This is silly. If you want good decisions to be made, you must put the right structures in place. So, if you want someone to act quasi-judicially, you ensure that he is legally - and culturally - independent. This requires much more than asking some guy to act a part, as Hunt was asked to.

My point here is not about the minutiae of Hunt's involvement in the News Corp bid, or even about the way in which takeovers are policed.

It's bigger than that. Tittle-tattle about whether Hunt should resign or not symbolises an ideology that disfigures our politics - the idea that what's needed for proper decision-making is men of the right character. But this is not enough. You also need the right systems. And these have not been in place.If Hunt does have to resign - and I can think of nothing I care less about - he will pay the price for a political system which over-rates the role of personality and under-rates the role of structure.

Alfred North Whitehead famously said that "civilization advances by extending the number of important operations which we can perform without thinking of them." By this standard, government hasn't advanced very much.

May 24, 2012

It's commonly thought that people are more likely to accept income inequalities if they believe these arise from equality of opportunity.For example, some attribute the relative weakness of the US welfare state to the fact that Americans believe (wrongly) that the poor have plenty of chances (pdf) to get ahead.

But what exactly is the link between perceptions of fair opportunity and demand for fair outcomes? Some experiments by Eugenio Proto and colleagues at Warwick University shed some worrying light.

They got people to play an ultimatum game, where one person proposes to split £10 between themselves and a partner. If the partner accepts the offer, both get the money agreed. If the partner rejects the offer, nobody gets anything.

The wrinkle was that the role of proposer - the advantaged position - was allocated by lottery which was either fair (giving people a 50-50 chance) or biased.

They found that when the lottery was fair, responders on average rejected offers of £2.15 or less. But when the lottery gave people zero chance of being a proposer, responders rejected offers of £2.96 or less.

This corroborates common sense. If people feel they have unequal chances, they'll demand more equal outcomes.

But what about intermediate levels of unfairness? When the chances of being a proposer were 20%, responders rejected offers of £2.39 or worse. And when the chances were 1%, they rejected offers of £2.53 or worse.

We can put this another way. The difference between a zero and one per cent chance is worth 43p - the difference between £2.96 and £2.53. But the difference between a 1% chance and 50% chance is only worth 38p - the difference between £2.53 and £2.15.

In other words, what people value most is having some chance - 1% versus nothing. Having greater opportunity - moving from a 20% to 50% chance isn't so valuable, in the sense that it doesn't so much affect bargaining behaviour.

This has (at least) two implications.

One is that it shows that people value procedural utility; having some chance to affect the outcome is what matters to them, rather than having a big chance.

The other is that, once some small chance exists, people don't greatly care about equalizing chances. They care more about having a small chance than about increasing their chances. These laboratory experiments confirm what we see in public opinion - that, like it or not, there is little demand for policies that would greatly equalize opportunity, such as abolishing private education or steep inheritance taxes.

I don't know why this is; I suspect it's related to the certainty effect. But surely lefties should be disquieted by the fact that egalitarian impulses can be bought off so cheaply even in laboratory conditions.

May 23, 2012

The Beecroft report (pdf) is drivel. By this, I don't mean that I disagree with it; I also disagree with the TPA's single income tax report, but I can at least see that is a serious piece of work. What I mean is that Beecroft make no attempt to engage with the serious research on the subject. It is, says David Renton, "puff" with "no expertise". Rick says it contains "no data at all" but"quack remedies."

This poses the question: why ever did the government think that such sloppy stool-water is an adequate basis for policy-making?

I suspect, though, that something else is happening. Beecroft continues a theme which was common under Blair and Brown - of believing that successful businessmen are somehow well-placed to review policy. Blair, for example, asked David Freud to review welfare to work policies even though, by his own admission, he "didn't know anything about welfare at all."

But why have such faith in businessmen? The answer, I fear, lies in the outcome bias. It's natural to see success and infer that some kind of skill lies behind it. So politicians see rich businessmen and think: "if you're so rich you must be smart."

But it ain't necessarily so, as this wonderful paper by Bjorn-Christopher Witte shows. He describes how, under some circumstances, competition will select not the most skilful, clever and hard-working, but rather the lucky chancer:

Under competitive conditions that favor riskseeking behavior, the importance of skill decreases because actual outcomes are determined mostly by chance. In the extreme case, survivors are not the most skilled but simply the luckiest risk-seekers.

He discusses this in terms of fund managers, but I suspect his point generalizes.

In this sense, we should be grateful to Beecroft. The slovenliness of his report has served a useful function. It highlights how competition does not necessarily favour the smart and rational, and how politicians' deference to the wealthy is founded upon cognitive error.

May 22, 2012

Whenever he was faced with a blustering student - which was often - my old economics tutor, the late Andrew Glyn, would ask: "What's the mechanism?" This is the question we should ask about the TPA's The Single Income Tax report. It says:

There is a long history of macroeconomic studies which have found that economies where public spending is a lower share of national income tend to see stronger economic growth.

It's in this context that mechanisms matter. There are (at least) four important, and often overlooked, features of mechanisms.

1. They vary across times and places. The TPA has in mind the idea that lower taxes stimulate entrepreneurship and investment. That's perfectly plausible. But isn't it possible that this mechanism would be weaker than usual now, given that the dearth of monetizable investment opportunities and the lack of supply of credit? The fact that lower public spending has often raised GDP growth does not suffice to show that it will do so here and now.

2. The precise type of spending matters. If by "public spending" you mean spending on airport "security", I'm with the TPA. But if you mean, say, instead spending on early years childcare, I'm not: this can raise growth both by freeing up women to enter the labour market and by raisinghuman capital in the longer term.

3. Institutional quality matters. Public spending which is funnelled into the pockets of bureaucrats would depress growth. But spending which has positive outcomes, such as raising educational attainment (harder than it seems (pdf)) or cutting transport congestion wouldn't.

4. There's a distinction between the long-term and short-term.In the long-term one way in which spending can affect growth is by affecting social norms.But this effect can be amibguous.On the one hand, small government might boost entrepreneurial spirits and self-reliance because youngsters believe there are few state jobs available to them. But on the other hand, the same distrust of the state which breeds small government might be an obstacle to growth-enhancing public spending; look at the state of US roads or public education.

Thinking in terms of mechanisms, then, helps us reconcile (sort of) the TPA's evidence with Lane Kenworthy's observation that the Nordic nations have combined high spending with good economic performance; they - perhaps unusually, perhaps not - have had the right sort of spending; points 2 and 3 have worked in their favour.

I'd just make some other observations.

First, it's perfectly coherent to believe that the relationship between public spending and growth varies from nation to nation. The fact that the Nordic countries have achieved good growth with high public spending does not create a case for other nations to raise public spending, if bad institutions cause that spending to go on boondoogles and bureaucrats rather than upon measures to raise outcomes.

Secondly, your attitudes to 1-4 are, I suspect, hugely conditioned by your priors. If you have faith in entrepreneurial spirits and scepticism about governmental quality, you'll side with the TPA on points 1-4. If you have faith in government but not in entrepreneurial spirits you won't. Cross-country studies don't much help.

Thirdly, this is no place for "bigthink." What really matters are the microeconomic details such as the precise types of spending and the institutions through which it is channelled.

May 21, 2012

There's a dilemma in policy thinking which doesn't get the attention it deserves - the dilemma of liberal Keynesianism.

It goes like this. On the one hand, one of the better ways of stimulating the economy is to increase public spending. And yet on the other hand, many of us are uneasy about the social, political and cultural effects of big government.

Many people, of course, respond to this dilemma as we do to many problems, by pretending it doesn't exist. The right tie themselves in knots by pretending that shriking the state has quick and large beneficial economic effects, whilst many on the left ignore the costs of big government.

But how should those of us who take the dilemma seriously respond?

One solution is to increase not current spending, but capital spending. This has two virtues. One is that it's not subject to a ratchet effect; once a road is built, you stop spending. The other is that it is less likely to lead to many of the nasty effects of big government, which are the promotion of social norms which breed arrogant and complacent public sector workers, an acceptance of hierarchy and a decline in initiative and self-reliance.

Another solution was described by Keynes. Bigger government, he thought, would actually encourage entrepreneurship because it would improve the odds of it succeeding:

If effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

I'm not sure if either of these answers is wholly convincing. Very few people are arguing for a big shift from current to capital public spending. And few entrepreneurs or their lackeys are enthusiastic Keynesians, perhaps for reasons spotted by Michal Kalecki. This suggests either that very few share my unease at the Keynesian dilemma, or - more likely I suspect - that these answers are inadequate.

It is, perhaps, in this context that Labour's fiscal conservatives might be onto something. As Hopi and colleagues wrote:

There are two major imperatives to a centre-left fiscal conservatism: to lock in fiscal sustainability in the long term; and to advance centre-left goals in the context of limited resources through clear priorities and bold reforms.

Unfortunately, it's not at all clear what those "bold reforms" should be, or whether they would work.

I suspect, then, that the liberal Keynesian dilemma is more acute that generally thought, especially at a time when the private sector seems unable to generate economic growth for itself.